Fighting corruption through strengthening financial integrity: Reflections on Pakistan’s experience
Fighting corruption through strengthening financial integrity: Reflections on Pakistan’s experience
Tom Keatinge and Anton Moiseienko
Western enablers not the whole story
Much of the anti-corruption work of the recent years has focused on ‘Western’ enablers of kleptocracy, namely financial and non-financial businesses operating in global financial centres. The ever-expanding literature on the subject includes academic studies, such as two recent books by Jason Sharman or Alexander Cooley and John Heathershaw, reports by anti-corruption NGOs – of which Transparency International has been particularly active – and investigative journalism, for example by Oliver Bullough and Ben Judah.
The sustained focus on the less-than-innocent involvement of financial centres such as London or New York in overseas corruption is welcome. That said, we argue in this post that at least as much attention should be paid to improving the integrity of the financial sector in developing countries, ‘the first mile’.
Based on our current research that examines the role of Pakistan’s financial system in preventing the laundering of the proceeds of grand corruption, we suggest that bolstering financial integrity in source countries of corruption-related financial flows is integral to law enforcement efforts, indispensable to building a sustainable domestic anti-corruption framework, and a necessary first line of defence against corruption and capital flight.
While these propositions might be self-evident, they call for greater attention on the part of policymakers, activists and academics to witting and unwitting enablers in states afflicted by grand corruption.
Ranked 117 in the 2017 Corruption Perceptions Index, Pakistan represents an example of a developing country with substantial economic potential that suffers from widespread corruption at various levels of government. The ongoing corruption trial of ex-Prime Minister Nawaz Sharif, whom Pakistan’s Supreme Court had removed from office for dishonestly failing to declare London real estate, is emblematic of the kind of allegations – well-founded or not – that beset the country’s political life. It also underscores the international dimension of Pakistani corruption, especially its UK connection. In 2017, the UK government specifically acknowledged financial crime risks resulting from the proceeds of Pakistani ‘corruption, fraud and drug trafficking’ (¶2.30).
Domestic shortcomings in the financial sector
However, it is of course within Pakistan that the proceeds of corruption are initially generated and from where they are transferred to overseas destinations. The opportunities for moving funds out of Pakistan are in part related to the continued prevalence of informal hawala and hundi operators, as noted by the US State Department in 2017 (p. 138). Although only two dozen of authorised ‘exchange control companies’ are officially allowed to make international remittances, enforcement efforts against unlicensed operators have reportedly been limited in effect.
Pakistan’s banks hardly have a spotless compliance track record either. In August 2017, Pakistan’s largest bank – HBL Pakistan, then known as Habib Bank Limited – was fined $225 million and stripped of its licence to operate in New York, pursuant to a Consent Order imposed by the New York Department of Financial Services (NYDFS) owing to HBL’s repeated failings in anti-money laundering (AML) controls. This enforcement action followed earlier agreements reached by New York authorities with the second- and third- largest financial institutions in Pakistan, the National Bank of Pakistan (NBP) and United Bank Ltd (UBL), both in relation to inadequate AML measures.
These incidents by no means spell doom and gloom for Pakistan’s financial system, but they do bring into stark relief the very real challenges the country is facing. Unless Pakistan succeeds in effective supervision and enforcement of its financial sector, it is unlikely to stem the outbound flows of the proceeds of corruption.
For Pakistani and foreign law enforcement agencies to build a 360-degree intelligence and disruption strategy for illicit financial flows originating in the country, including those related to grand corruption, it is necessary to minimise the amount of funds leaving Pakistan via the informal financial sector, since they are by definition extremely difficult to trace. At the same time, banks and registered exchange control companies need to carry out proper customer due diligence checks and report suspicious transactions to the Financial Monitoring Unit, as Pakistan’s financial intelligence unit is known.
More broadly, it is a truism that genuine anti-corruption success is only possible through developing effective, fair and accountable domestic institutions. While clamping down on foreign enablers of kleptocracy is long overdue, in the long run this must be accompanied by a corresponding focus on domestic facilitators. Here, financial institutions play a crucial and sensitive role as law enforcement’s best friend – due to their being uniquely well-placed to detect and report suspicious activity – but also, potentially, a witting or unwitting enabler of corruption.
Finally, one persistent concern that plagues anti-corruption efforts is the possible displacement effect. As soon as one jurisdiction becomes less welcoming to foreign money of dubious provenance, another one tends to fill its place. The uniform enforcement of international standards, such as those promulgated by the Financial Action Task Force, is crucial. But equally, so is the recognition of the fact that, ultimately, the best bet that countries affected by endemic corruption have is buttressing the integrity of their own institutions, both in the public and private sector.
Towards a more holistic approach
This is not to say that the current work on Western enablers of corruption should be abandoned. On the contrary, what we need is a holistic overview of the lifecycle of corruption schemes, from Karachi to London, examining the role of both financial and non-financial businesses.
One should also recognise that, for practical reasons, ‘Western’ activists and academics can exert greater impact on public opinion and policy in their own countries, although even that cannot be taken for granted. So, it is perfectly sensible for them to concentrate their efforts on the wrongdoing that is closer to home. Ideally, however, they should be complemented by analysis of opportunities for remedial intervention available within ‘source’ countries of corruption. In fact, the role that foreign analysts can play is all the more significant given that in some states, issues of meaningful anti-corruption reform are too sensitive for local commentators to research.
In short, the integrity of the financial sector appears central to an effective anti-corruption framework, in Pakistan and elsewhere in the developing world. The research to date has largely dispelled the notion that corruption is only of a matter of concern to those countries directly affected, as evidenced by the statement of the House of Commons’ Foreign Affairs Committee that ‘[t]he damage that [dirty] money can do to UK foreign policy interests, by corrupting our friends, weakening our alliances, and eroding trust in our institutions is (…) potentially enormous’. Building on that insight, we now need to further advance our understanding of how the movement of dirty money around the world is facilitated, including at its very source.
Tom Keatinge is Director, Centre for Financial Crime and Security Studies, RUSI
Anton Moiseienko is Research Analyst, Centre for Financial Crime and Security Studies, RUSI